Items you will need
- Phone number to the investment company acting as custodian of your Roth IRA
- Your account number(s)
- IRS Form 1040X, Amended Return
- IRS Form 8606, Nondeductible Contribution to IRA
If you have made Roth IRA contributions for the incorrect year, you may be in a tax bind. The penalties for making an excess contribution to a Roth IRA is substantial. If you contribute more than you are entitled to into a Roth IRA, the IRS levies a 6 percent excess contribution tax on the difference every year until you correct the discrepancy. There are three possible remedies to the situation: withdraw your excess contribution, recharacterize your excess contribution to a traditional IRA, or, if you have no over-contribution issues, file an amended return.
Withdraw Excess Contribution
Identify the amount of excess contribution. You can do this by comparing your income to the Roth IRA eligibility tables published by the Internal Revenue Service in Publication 590: Individual Retirement Arrangements.
Determine any penalties you may be subject to if you withdraw funds from your Roth IRA. For example, if you are younger than 59 and a half years of age you may be subject to a 10 percent excise tax penalty on funds left in your Roth IRA for less than five years. Certain exceptions may apply. These exceptions are detailed in IRS Publication 590.
If the penalties, if any, are acceptable to you, then direct the investment company to send you the funds. Generally, they can do this by wire or by paper check. You may have to provide authorization in writing to withdraw funds from a retirement account. Follow the instructions specific to your financial institution.
Recharacterization of Your Roth IRA
Determine the amount of over-contribution to your Roth IRA by comparing your income to the eligibility criteria listed in IRS Publication 590, pages 56-58.
Determine if you are eligible to contribute to a traditional IRA, again, by comparing your income to the criteria listed in IRS Publication 590, pages 7-12.
Contact the financial institution acting as trustee for your Roth IRA.
Direct them to execute a trustee-to-trustee transfer and recharacterization of the over-contribution to your Roth IRA.
If you do not qualify for a deduction on IRA contributions, file an IRS Form 8606, Non-Deductible IRAs and Coverdell ESAs and an IRS 1040X, Amended Return.
If You Meet the Income Criteria for Both Years
Contact the financial institution acting as trustee for your Roth IRA and direct them to change the date on the contributions in question to reflect the correct year.
File an IRS Form 1040X, Amended Return, noting the change.
Keep all tax records for at least six years.
If you can recharacterize rather than withdraw, you may be able to avoid penalties and giving up earnings from the account for the prior year.
Compare your eligibility for Roth and traditional IRA contributions alike during the incorrect year as well as the correct one. Make sure you are not accidentally violating IRS contribution limits for your income levels in either year.
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